STRENGTHS

Hosting of World Cup 2022 that sustain infrastructure and construction activities

Huge financial buffers

WEAKNESSES

Limited flexibility of the monetary policy due to the currency peg regime

Dependence on foreign labour

Possible negative impacts of longer-than-expected diplomatic rift

Rising geopolitical turmoil

RISK ASSESSMENT

Negative impacts of the diplomatic rift contained so far

The Qatari economy posted a disappointing growth figure in the second quarter of 2017. Real GDP increased by 0.6% year-on-year in the second quarter – a slowdown from the 2.4% year-on-year recorded in the first quarter. However, this decline in growth performance was mainly due to the floundering oil sector and subdued energy prices. The mining and quarrying sector, which accounted for almost half of GDP on constant prices, shrank by 2.7% year on year in the second quarter of 2017, following a contraction of -0.4% year on year during the first three months. The OPEC agreement, which includes production cuts by major oil producers, has negatively affected the sector. Non-oil sectors showed a growth of 3.9% year-on-year in the second quarter of 2017, decelerating from 5.2%.

On a quarterly basis, non-oil activity remained flat, indicating that the economy has been affected by the Gulf crisis. Nevertheless, impacts have remained under control so far as the government stepped in to support the economy. It has deposited billions of dollars into the local banking system to prevent liquidity from drying up, as Gulf residents have started to withdraw their deposits. It also reorganized supply chains in cooperation with other regional and international actors. On the other hand, Qatari banks have showed resilience since the start of the crisis, mainly thanks to rising public funds. Banks also enjoy funding from regions outside the Gulf Cooperation Council (GCC), such as Asia and Europe, which is helping them to offset sanctions.

Prolonged crisis may weaken growth dynamics

So far, the main impacts of the crisis have been felt in the construction, retail trade, and transportation sectors which contracted on a quarterly basis by 4.1%, 2.6%, and 7% respectively over the April-June period. A continued crisis will drag down the pace of growth, as it will negatively weigh on consumer and investor confidence. The fact that headline inflation has remained subdued so far can be considered as a positive development but further increase in prices would result in a reluctance of consumers from spending further.

Certain non-hydrocarbon sectors, such as tourism and transportation, will particularly suffer from the sanctions. Expansion of the crisis would result in higher costs for Qatar, which would impede growth in the construction sector, and would push prices up due to the higher costs of building materials. Growth in the tourism sector is expected to slow as well, as nearly 40% of tourist arrivals into the country originate from the Gulf region. Any decline in energy prices will also drag down growth performance. Additionally, rate hikes from the US Federal Reserve is expected to force Qatar’s central bank to tighten its monetary policy due to the currency peg regime.

The liquidity of the Qatari banking system will continue to be an important topic to monitor. Banks are likely to rely more heavily on government funding and extra regional funds. This could represent a challenge, as international investor confidence could rapidly be hurt by higher volatility in energy prices or an escalation in diplomatic uncertainties. Qatar’s substantial financial buffers should be able to help mitigate these risks, but it should be noted that Qatari authorities have already warned banks to tap international markets for raising funds, rather than over-relying on public funding.

Domestic political scene remains stable

Tensions within the GCC should not represent a major risk in terms of domestic political scene in Qatar as long as growth momentum continues and living conditions remain the same. With the government efforts to support the economy through its huge financial assets, a possible public discontent would be unlikely. So far, Qatar has responded to the quartet’s (Saudi Arabia, UAE, Bahrain and Egypt) demands by enforcing its relations with Iran instead of curbing them. Although the country is expected to remain politically stable in the upcoming period, higher regional turmoil may undermine this stability through the emergence of new alliance and conflicts in the region.